Amazon basics: part 2 – understanding costs & net margin as a seller
Turnover is vanity, profit is sanity but cash is king. One of the main difficulties for sellers is identifying their true net margin on Amazon. It’s not an easy thing to do when Amazon fees, VAT, shipping and forex rates are changing all time time.
With multiple cost inputs and a volatile marketplace, effective pricing that maintains profitable margins is hard to achieve. When the end sale price is constantly changing in reaction to marketplace moves and selling costs are hard to pin down, you run the risk of selling at a loss.
Sellers who eliminate unprofitable sales and generate predictable revenues are far more likely to thrive on Amazon.
Net Margin on Amazon
A standard definition of how net margin on Amazon is calculated is – the percentage of revenue remaining after all operating expenses, taxes and fees have been deducted from the sale price.
There are certain costs associated with selling a product:
- The purchase price
- Shipping and packaging costs
- Value added tax (VAT)
- Various platform fees (listing, item, webstore and closing fees. Subscriptions. PayPal etc )
Calculating the sale price so you make a worthwhile profit (and avoid making a loss):
In the example above, you can see the cost breakdown for an HP Inkjet Cartridge.
The product costs £38.98 to purchase.
With all the additional costs included the total cost is £68.15 (£29.17 + £38.98).
This is the break even point, neither losing or making any money.
Here, we’ve factored in £11.33 as the net margin. The total sale price needs to be £79.48
Protect Your Net Margin on Amazon
There are two answers to this. The first is to map out the cost of sales across your entire inventory. It’s a lot of work but the benefits can exceed the risk of getting it wrong and the time spent doing it manually.
The second option is net margin repricing; using software to handle this for you on each product. Repricing tools for Amazon sellers vary in quality and functionality. Very few offer net margin repricing.
The ability to identify your net margin on Amazon, analyze the performance of individual SKU’s and remove unprofitable items is invaluable.
Net margin repricing stops you from selling at a loss. All the associated costs for every product can be built in to the repricer. The software calculates the minimum selling price and makes sure you don’t fall below it, getting rid of those unprofitable sales.